1. Understanding the Roth TSP Presented for: Honolulu-Pacific Federal Executive Board By: Ann Vanderslice Securities offered through Allied Beacon Partners, Inc. Member FINRA/SIPC. Home office 1201 S. Highland Avenue #2, Clearwater, FL 33756 727-441- 1616

2. What We Will Cover Today: How Does Roth TSP Work? Contribution Rules and Limits Comparison of Roth TSP to Traditional TSP Roth TSP Benefits and Pitfalls History of Income Taxes Tax Implications While Working Tax Implications While in Retirement

3. 3 How Does Roth TSP Work? Combined contribution limit for 2012 is $17,000, plus $5,500 catch-up if age 50 or better Agency contributions will go into Traditional TSP Interfund transfers, contribution elections, loans and withdrawals will apply to both TSP and Roth TSP You cannot convert TSP funds into Roth TSP You can transfer a Roth 401(k), Roth 403(b) and Roth 457(b) into Roth TSP but NOT a Roth IRA 3

4. Contribution Rules and Limits Anyone that is eligible to contribute to TSP is also eligible to contribute to Roth TSP No income limitations for contributing to Roth TSP Combined total of Roth TSP and Traditional TSP cannot exceed $17,000 and catch-up of $5,500, if age 50 or above You can contribute the maximum to Roth TSP as well as the maximum to an individual Roth IRA; however, there are income restrictions for a Roth IRA

5. Roth IRA Eligibility Contribution limit $5,000, plus $1,000 if over age 50 Income limits to contribute to Roth IRA - $110,000 - $125,000 single & HOH $173,000 - $183,000 joint $ 0 - $10,000 married filing separately Roth Conversion - NO Income Limit

6. Comparison of Roth IRA and Roth TSP Similarities:  Contributions are made with after-tax dollars and can be withdrawn income tax-free if you are age 59 1/2 and follow the 5-year rule, (Roth has to be established for at least 5 years in order to allow earnings to come out tax-free)  Paying the tax in today’s known tax environment may prove to be a valuable tool during retirement

7. Comparison to Roth IRA and Roth TSP Differences: You are not required to take a minimum distribution from a Roth IRA, but you are required to begin taking RMD’s from the Roth TSP by April 1st following the year you turn age 70 1/2 if you are no longer employed by the federal government There are income restrictions to contribute to a Roth IRA; however, there are NO income restrictions to contribute to Roth TSP You can contribute significantly more to the Roth TSP than a Roth IRA. Depending on your income and age, the maximum contribution level for the Roth TSP is $22,500 vs. $6,000 for a Roth IRA

8. Considerations Before Deciding to Use the Roth TSP 1. Your current tax bracket - how much room do you have in your current tax bracket for additional taxable income? 2. Once you know how much of your eligible contribution you could make at the same tax rate, you’ll want to determine the net effect on your paycheck. Using the Roth TSP means more money will come out of your paycheck for taxes leaving you with a lower net pay. 3. Do you have an income strategy for your TSP at retirement? With the complicated Roth TSP and withdrawal rules, you need a plan for withdrawing and using your TSP in retirement. 4. Contributing to the Roth TSP can take the uncertainty out of future tax rates and their impact on your retirement income

9. Married filing jointly Source: Tax Foundation, 2005; CCH, 2009 2012 Marginal Income Tax Rates $0 -$17,40010% $17,401 -$70,70015% $70,701-$142,70025% $ 142,701 - $217,450 28% $ 217,451 - $388,350 33% $ 388,351- and over 35%

10. Considerations Before Making a Decision If you choose to contribute to the Roth TSP be aware: -Increased income may affect the tax owed on income tax deductions, exemptions, and the ability to use tax credits (as well as Social Security income, Medicare Part B premiums, if applicable) -Increased income may also affect your children’s ability to receive scholarships and financial aid A Roth TSP can be rolled over to a Roth IRA and provide an income tax free legacy for your children and grandchildren

11. Reasons Not to Have a Roth IRA Income tax is due now No tax deductions for Roth IRA contributions The tax deduction is needed now You believe you will be in a lower tax bracket when withdrawals are made

12. The Future of Tax Rates Where do you think tax rates are headed in the future? 1) Increase 2) Decrease 3) Stay the same

13. Prospects of Higher Taxes

14. Top Federal Tax Rates 1913 - 2009 Source: Tax Foundation – www.taxfoundation.com and H.S. Dent Foundationwww.taxfoundation.com

15. Married filing jointly Source: Tax Foundation, 2005; CCH, 2009 2012 Marginal Income Tax Rates $0 -$17,40010% $17,401 -$70,70015% $70,701-$142,70025% $ 142,701 - $217,450 28% $ 217,451 - $388,350 33% $ 388,351- and over 35%

16. Married filing jointly Source: Tax Foundation, 2005; CCH, 2009 2013 Marginal Income Tax Rates (After extension of Bush Tax Cuts expire) $0 -$43,85015% $43,850 -$105,95028% $105,950-$161,45031% $161,450- $288,350 36% $ 288,350+ 39.6%

17. Two Kinds of Taxes: Current Taxes  Deferred Taxes “The deficits and escalating debt levels of the size we have now, and where they are headed, represent deferred taxes with interest that we, our children and our grandchildren will be expected to pay. If we don’t get our act together, within 20 to 25 years, federal taxes alone will be more than double! That’s without an increase in interest rates, which is not realistic.” ~David Walker Former Comptroller of U.S. Government President and CEO of the Peter G. Peterson Foundation

19. Two Key Factors are: Historical Debt Private and Public Debt www.usdebtclock.org

20. Total United States Debt: Government Debt: $18.2 Trillion Private Debt: $37.4 Trillion Consumer: $12.3 Trillion Corporate: $11.6 Trillion Financial: $13.5 Trillion Data Source: Federal Reserve Flow of Funds Report, 2012

21. The Four Buckets TAXABLETAX-DEFERREDTAX-FREE INCOME & ESTATE TAX-FREE Bank Brokerage Trust Ret. Plans including TSP Non-Qualified Annuities Savings Bonds Muni-Bonds Roth IRA Roth TSP Life Ins. ILITs CRTs Special Trusts Tax Strategies move assets to the right

22. Is Roth for You? Taxes Now? Taxes Later? How Much to Roth TSP? How much to Traditional TSP?

23. Take Advantage of our TSP Roth Consultation Optional Paycheck Calculator to determine differences in your net paycheck if you choose to do all or partial contributions to Roth TSP

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26. 26 A penny here, and a dollar there, placed at interest, goes on accumulating, and in this way the desired result is attained. It requires some training, perhaps, to accomplish this economy, but when once used to it, you will find there is more satisfaction in rational saving than in irrational spending. ~ The Art of Money Getting, by P. T. Barnum